Chapter 2
Debt to assets ratio
-A measure of solvency -Measures percentage of total financing provided by creditors rather than stockholders. -Higher the percentage of debt financing, riskier the company. -Example on 56
Long term liabilities
-AKA: long term debt -Obligations a company expects to pay after one year. -Examples include: bonds payable, mortgages payable, long term notes payable, lease liabilities, pension liabilities.
Solvency
-Company's ability to pay interest as it comes due and repay balance of a debt due at its maturity. -Long term creditors and stockholders are interested in this
Long term investments
-Investments in stocks and bonds of other corporation that are held for more than one year -Long term assets such as land or buildings that a company is not currently using in its operating activities -Long term notes receivable
Current liabilities
-The first section of liabilities and stockholders equity -They are obligations that company is to pay within next year or operating cycle, whichever is linger. -Examples include: accounts payable, salaries and wages payable, notes payable, income tax payable. -Another example is current maturities of long term obligations.
depreciation
A lessening in value
Liquidity
Ability to pay obligations expected to become due within next year or operating cycle.
Securities and Exchange Commission (SEC)
Agency of US government that oversees U.S. financial markets and accounting standard seeing bodies.
Consistency
Means that company uses same accounting principles and methods year to year
Solvency ratios
Measure ability of company to survive over long period of time
Profitability ratios
Measure income or operating success of company for a given period of time
Current ratio
Measure of liquidity Example on 55
Liquidity ratios
Measure short term ability of company to pay its maturing obligations and meet unexpected needs for cash
Earnings per share (EPS) description and formula
Measures net income earned on each share of common stock. Important to note that comparisons of EPS across companies are not meaningful because of variations in number of shares of outstanding stock. Example on 53
Free cash flow Description and formula
Net cash provided by operating activities after adjusting for capital expenditures and dividends paid.
Current maturities of long term obligations
Payments to be made within the next year on long term obligations
Ratio analysis
Relationship among selected items of financial statement data.
Full disclosure principle
Requires companies to disclose all circumstances and events that make different to financial statement users.
Monetary Unit Assumption
Requires that only things than can be expressed in money are included in accounting records. So customer satisfaction isn't in accounting records.
Comparability
Results when different companies use the same accounting principles
accumulated depreciation
Shows the total amount of depreciation that the company has expensed thus far in assets life. Book value
Goodwill
The value of all favorable attributes that relate to a company that are not attributable to any other specific asset.
Working capital
Working capital= current assets-current liabilities A measure of liquidity
What classification is unearned service revenue
current liabilities
How are current assets listed
in the order they expect to convert them into cash. Order listed on previous card.
Going concern assumption
Business will remain in operation for foreseeable future.
Stockholders Equity
Common stock and retained earnings.
Historical cost principle
Companies record assets at their cost. So if land purchased for $30,000 increases in value to $40,000. It continues to be reported at $30,000.
Cost constraint
Constraint that weighs cost companies will incur to provide info against benefit that financial statement users will gain from having info available.
Intracompany comparisons
Covers two years for the same company
Fair value principle
Assets and liabilities should be reported at fair value ( the price received to sell asset or settle liability.)
Current assets
Assets that a company expects to convert to cash or use up within one year or its operating cycle, whichever is longer. Examples include: (1) cash, (2) investments [short term], (3) receivables [accounts receivable], (4) inventories, (5) prepared expenses [insurance and supplies].
Intangible assets
Assets that do not have physical substance and are very valuable. Example goodwill, patents, copyrights, trademark, trade names.
Property, Plant, and Equipment
Assets with relatively long useful lives that are currently used in operating the business. Examples include: land, buildings, equipment, delivery, vehicles, furniture.
Industry average comparisons
Based on average ratios for particular industries
Intercompany comparisons
Based on comparisons with a competitor in the same industry
Weakness of current ratio
Does not take into account composition of current assets. So if cash balance declines and inventory increases, current ratio might not fully reflect reduction in liquidity.
A debt to assets ratio of 72% means what
Every dollar of assets was financed by 72 cents of debt.
Economic Entity Assumption
Every economic entity can be separately identified and accounted for. Important not to blur company transactions with personal transactions.
What does a current ratio of 1.41:1 mean
For every dollar of current liabilities, the company has $1.41 of current assets.
Classified balance sheet
Groups together similar assets and similar liabilities, using a number of standard classifications and sections. The classifications for assets: current assets...long term investments... property, plant, and equipment.... intangible assets The classifications for liabilities and stockholders equity: current liabilities, long term liabilities, stockholders equity
Info has quality of understandability
If it is presented in clear and concise fashion
Info is Verifiable if...
Independent observers, using same methods, obtain similar results
International Accounting Standards Board (IASB)
Issues standards called International Financial Reporting Standards (IFRS).
Public Company Accounting Oversight Board (PCAOB)
Job to determine auditing standards and review performance of auditing firms.
Periodicity Assumption
Life of a business can be divided into artificial time periods and useful reports covering those time periods can be used for business. Ex: all four business statements cover one year.
Financial Accounting Standards Board (FASB)
primary accounting standard setting body in U.S.
for accounting info to have relevance, it must be
timely